A Fizzy, Risky Stock Idea

This article is part of our Rising Stars Portfolio series.

My Rising Stars portfolio embraces companies that pursue sustainable business practices, renewable resources, and social responsibility. Carbonated drinks might not seem like a natural fit with these lofty ideals, but one company I'm watching might manage to cater to consumers' collective sweet tooth while still making the world a sweeter place.

Beyond SodaStream's (Nasdaq: SODA  ) recent skyrocketing performance, the company's business model incorporates an eco-friendly hook. The more people use its machines to make their own sodas at home, the fewer empty containers those thirsty consumers will send to landfills. The company aims to "create a world free from bottles," claiming that it has "saved the world from over 1 billion plastic bottles" since January 2009.

Environmentally aware consumers already know about the evils of wastefulness and the particular perils of plastic. Shareholder activist As You Sow recently urged giants Coke (NYSE: KO  ) , PepsiCo (NYSE: PEP  ) , and Nestle to create better packaging-recycling policies. Despite consumers' increased efforts to recycle their refuse, about 40 million tons of packaging still gets landfilled or burned in the U.S. As You Sow notes that products and packaging make up 44% of U.S. greenhouse gas emissions.

SodaStream sounds like an exciting stock idea. Still, I'm haunted by another upstart soft drink play that disappointed investors' fizzy expectations. Jones Soda once enjoyed major cool cred -- but topped out at nearly $30 in April 2007. Now it's just a sad penny stock. Hansen Natural (Nasdaq: HANS  ) has fared far better, but in this difficult industry, consumer tastes can be fickle.

It's cheeky and bold to go for a hefty piece of the market dominated by beverage giants like Coke, Pepsi, and Dr. Pepper/Snapple (NYSE: DPS  ) . SodaStream's got its sights set high -- but do investors have their sights set too high?

SodaStream trades at a nosebleed 74 times trailing earnings. By comparison, Pepsi's trading at just 19 times earnings, and Coke's price-to-earnings ratio is a measly 13. If SodaStream's current popularity and growth potential simply reflect just another passing fad, investors who buy in now have a lot to lose.

Bottom line: SodaStream's on my watch list because of its business's compelling elements, including its urge to save the world from plastic bottles. But for now, I'm staying on the sidelines. As long as the price is this fizzy, this stock is risky. Share your thoughts in the comments box below.

This article is part of our Rising Stars Portfolio series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

The Motley Fool owns shares of Coca-Cola and PepsiCo. Motley Fool newsletter services have recommended buying shares of Hansen Natural, Coca-Cola, SodaStream International, and PepsiCo. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned in her personal portfolio. For more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 06, 2011, at 3:29 PM, chadscards1274 wrote:

    The comparison of SodaStream to either Coke or Pepsi or even Jones Soda and Hansen are not fair comparisons. None of these other companies do what SodaStream is trying to do...in short SodaStream is trying to convince buyers that it's more environmentally friendly and more convenient to make their own soda then to buy the soda at the store. The reviews on Bed Bath and Beyond as well as Amazon are overwhelmingly positive, and there is no question Best Buy adds a positive to the story. The main complaint that most users have is few places to get CO2 canisters refilled. With both Bed Bath and Beyond and now Best Buy that should be less of an issue.

    While it's true based on trailing earnings the P/E is high very few investors buy based on trailing earnings. If you look at future earnings projections the P/E is still high but better. This is a company that doesn't have to get a huge piece of the soda market for the valuation to be justified. That being said I believe the action in the last few days is a short squeeze playing out. If the stock dropped back closer to the $55-$60 point the value gets a little more interesting.

  • Report this Comment On July 06, 2011, at 4:40 PM, David369 wrote:

    MHenage,

    Good comments.

    Yeah Jones Soda died out with the economy. The drinks were good but just cost too much. Sodastream hits three main points: cheaper, greener, and better for you (somewhat, no HFCS and they use splenda instead of uh, whatever). All the current socially correct themes. Price is low enough to make a nice present and can easily be justified with "I'll save money in the long run" if you just want one for yourself. I figure the stock will follow in the footsteps of green mountain.

    No, I don't have one since I just don't drink much soda, or anything except water and coffee.

    Dang Alice L., what are you waiting on? It's not like it is a new company. They have been selling well over in Europe for the last couple of years. If the practical Europeans are buying these things you can bet the gullible Americans will snatch them up. Are you still waiting for green mountain to fizzle too?

  • Report this Comment On July 07, 2011, at 8:54 AM, RengawJ wrote:

    Who cares- I'm in SODA with a market stop! I'f you that worried buy a put. Use insurance. Known one knows if i't going to $200 or $2? The PE is in nose bleed terr. I agree. Everyone wants internal growth and this is it. You can't compare this to Coke and Pepsi!

  • Report this Comment On July 07, 2011, at 2:03 PM, David369 wrote:

    WTG RenqawJ Who knows, a few years from now you might buy Motley Fool from the profits off SODA. Alyce will still be waiting for the PE to go down or the fad to pass.

  • Report this Comment On July 16, 2011, at 3:11 PM, edlaina wrote:

    Stock markets employ loud talking empty headed young men and woman who always say their pick is terrific. For a real down to earth great value in a home soda maker go to www.mypopsoda.com

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